We need Wall Street greed control.
Why greed control ? Time after time reporters of the financial scene are telling us that unbridled greed spurred otherwise rational bankers and other financial executives to make the stupid bets that has caused the mortgage meltdown and spread a recession throughout the world while many people in developed country’s around the world have seen declines in their net worth of 30-50%. The AIG Bonus Blowup just underlines the point. Too many AIG and other financial executive have misplaced expectations:
a)they do not see themselves individually or collectively responsible for the current financial crisis;
b)rather they see these events as temporary, a once in a hundred year aberration like Hurricane Katrina,
c) and therefore financial markets are not broken but ready to roll after “the Feds fix it” at minimal cost to them;
d)with their return to total compensation packages of 500 to 50,000 times the average workers ($43,000 in the US) as being totally justified and frankly overdue.
In short, if the Ivey Business School believes executive compensation is out of whack; then financial executive compensation is so badly out of tune that executives in this category, protected by golden parachutes and merry-go-round rehire policies in the industry, are certainly impelled to make the incredibly bad bets of the past few years in their efforts to get higher up the financial compensation ladder. And of course, the extravagant financial earnings ladder act as a defensive bulwark for Fortune 500 executive compensation because they can say their total pay packets are “only” 50 to 500 times the average workers pay. Whats needed is a Made-in-America solution, Six Sigma Compensation.
Executive compensation has been out of whack for several decades, well beyond the 8 years of Trickle Down Policies which provided the rationale for executive pay being allowed to be badly askew. But with financial executives now pulling down $1.5 billion annual pay packets, it is in the arena of finance that compensation teeters on an Alice-in-Wonderland world. And with UBS about to disclose major US tax evaders, the the financial executive community is set to stand before all as you- choose-your-way for saying Not Masters of the Universe. We have chosen Greedy Gutters because of its puerile tone yet glee in evisceration which seems to match reasonably closely these self-proclaimed Darwinian Lords and Masters of Finance.
The three most conspicuous reasons why financial executive compensation has to be changed are almost self evident.
1)Like general CEO compensation, Financial executive compensation has been out of skew for a long time as noted in this Ivey Business School study. The key problems are a)growth that are several multiples of the rate of inflation, b)huge increases in bonus and incentive compensation whose vesting rules fails to align executives with shareholders interests because most executives divest immediately and as a result no correlation between pay and performance exists – particularly downward performance. As noted in the Fortune article this problem of “ever upward” is endemic to executive compensation.
2)Financial executive compensation reaching billions of dollars per year acts as a cover for $20-40Million executive pay packets including golden parachutes commanded in the Fortune 500 market;
3)Financial and executive compensation has been at the heart of the growing income distribution inequality favoring the most wealthy in the US. As of 2005, the top 1% of wage earners took slightly more than 17% of national income and that has more than doubled since the 1980’s Reagan era. US Income Inequality is only matched by numbers prior to and during the Great Depression and exceeds all other developed countries.
The implications of these trends are enormous. The data cited is as of 2005, preliminary numbers indicate that the top1% of wage earners will take nearly 23% of total US income in 2008. As noted in the OECD report, this has implications for educational, social, and health programs in countries with great disparities in income. In addition, as the US needs to realign its corporate incentives systems towards more innovation and manfacturing prowess, this will require large compensation shifts out of the ecutive suite and towards manufacturing, IT, HR, R&D and other centers that have been drastically cutback. How can Detroit hope to lead in automotive innovation when R&D and manfacturing expertise has been sacrificed for quarterly income statements. The Deterence Factor Many financial executives Scott Free for some. No cost …. What Has Been Proposed by An Anlysis of Proposed So let us taken as given that up-elevator Masters have been vastly over-paid well before the down-elevator Financial downturn where they thought first and foremost to preserve Examination of Recent Executive Compensation ChangesThere have been a couple of major executive compensation proposals made regarding the pay packets top financial executives who have been taking bailout money and, among other things, paying lavish bonuses to themselves and their underlings. First, lets examine why financial executives compensation should be controlled:1)Wall Street executives are getting total compensation packets of between $15M and $1500M which are